When Can Bias by an Appraiser Constitute Grounds to Set Aside an Appraisal Award? [Part I]

Although there are multiple approaches for property owners seeking to resolve an insurance claim dispute, policyholders often assume that the appraisal remedy is as effective as a lawsuit. The vast majority of homeowner’s insurance policies include a provision that permits either party to submit a dispute for resolution through the appraisal process. While the objective of an appraisal is to furnish an efficient, low-cost, and expedited resolution to claims disputes, many times the matter is far from over even after an appraisal award. Insurers frequently refuse to pay appraisal awards, so policyholders are compelled to file a lawsuit to enforce the award.

While an insurance appraisal award can be vacated, courts generally are hesitant to do so unless the award was given without authority or the outcome was the product of mistake, misconduct, or fraud by the appraiser. Both the insurer and the insured typically are expected to select an appraiser who will supply an opinion on the value of a loss that is independent and not biased. Generally, the parties are expected to pick appraisers who do not have a financial interest in the outcome of the appraisal and who are impartial.

Policyholders who plan to seek disqualification of an appraiser based on bias or conflict of interest should do so prior to an unfavorable award. The background and relationship of the appraiser to the insurer must be evaluated to determine whether the insurer’s appraiser can be disqualified based on prejudice or bias. Insurers also will sometimes seek to disqualify an appraiser for an insured. There are a range of claims related to the partiality of an appraiser that may justify disqualification. This two-part blog post explores a few of the factors a court will consider when determining if bias or conflict of interest by an appraiser merits disqualification.

Pecuniary Interest in Outcome of the Appraisal Process

If an appraiser is shown to have a financial interest in the appraisal, this type of motivation for bias might justify disqualification. In a Texas case, the court ruled that an appraiser was not disinterested or impartial because the appraiser was to receive bonus compensation if the award exceeded a designated dollar amount. The court ruled that this type of arrangement meant the appraiser had a direct financial interest in the result, so the insured’s appraiser was not disinterested.

Use of Contingency Fee Arrangement

While the use of a contingency fee arrangement can give an appraiser a direct financial interest in overestimating the value of a claim, a number of courts have ruled that a contingency fee can be used to pay an appraiser. However, other courts have found such an arrangement to be improper, so policyholders need to obtain legal advice on this issue prior to retaining an appraiser. A Florida court in Rios v. Tri-State Ins. Co. found that a contingency fee arrangement could be utilized in this situation provided the arrangement was disclosed to the panel. The policyholder initiated litigation to compel appraisal based on losses incurred in a hurricane. The policy’s appraisal provision provided that both parties select an appraiser “not subject to control, restriction, modification, or limitation from a given outside source . . . and not subject to control by others.” The court concluded that an appraiser can be “independent” even when compensated by a contingency fee in the same matter.

While other jurisdictions have reached similar conclusions, courts in some states have reached a contrary result. Further, the language of the policy might affect a court’s decision regarding the impact of a contingency fee on the outcome. Some courts have expressed disapproval of the use of contingency fee agreements in these types of cases because of the appraiser’s direct financial interest in the value of the claim.

Because a contingency fee could lead to disqualification of an appraiser, policyholders should seek legal advice regarding the appropriateness of a contingency fee agreement when hiring an appraiser. Many policyholders would be unable to obtain the services of an appraiser without the ability to rely on a contingency fee arrangement.

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